What's an Investor to do in Markets like These?

Legendary businessman Steve Forbes once said, "Everyone is a disciplined,
long-term investor until the market goes down." It's challenging to have the
fortitude to hold on to investments during a one-day carnage event like last
Thursday. Everywhere you looked there was red on the screen, as U.S. stocks
lost 2.5 percent, commodity equities lost 3 percent and gold declined 5 percent.
Gold stocks took one of the biggest blows, falling about 7.5 percent.

So what should an investor do after a day like Thursday? Stay calm and invest
on, as I believe there is opportunity in picking up what the bears left behind.
Here are a few ideas to ponder.

Gold

Gold fell below $1,300 on Thursday, and based on our oscillator data, the
yellow metal is now in extremely oversold territory. On an annual basis, bullion
is down 2.6 standard deviations, which is the worst reading over the past 10
years.

This is the opposite reading that gold buyers had in the summer of 2011, when
it was up 2 standard deviations, or at the $1,900 level.

Last week, before this market event occurred, I said that gold could fall
another ten percent, but that there could be a 30 percent upside over the next
18 months. You can see the upside potential in the chart, as gold appears due
for a reversal toward the mean.

However, short-term financial gold traders may be discouraged from acting
on this bullish sign, as the yellow metal is now even more expensive to trade.
After last Thursday's huge sell-off, the CME Group, the largest operator of
futures exchanges in the U.S., decided to raise margin requirements on gold.
As of the close of trading on June 21, the minimum cash deposit for gold futures
will increase 25 percent to $8,800 per 100- ounce contract, reports Bloomberg.

This is the second increase in only three months. In April, the CME raised
the initial gold margin requirement, which is what triggered the short-term
liquidation out of financial gold ETFs and futures.

This isn't a typical move for the CME. Usually, the firm raises margins when
prices are rising rapidly to cool down speculation or lowers margin requirements
in an attempt to boost liquidity.

In contrast, cash buying of gold is increasing, and this is good news for
two reasons: 1) Retail gold investors are not leveraged like futures gold trader,
and 2) their buying tends to be stickier.

As we have always suggested, it is prudent to have a 5 to 10 percent exposure
and to view gold as a longterm investment. It's important to rebalance annually
or when the oscillator shows that gold has moved 2 standard deviations.

Weakness in ETFs Highlights Strength in Mutual Funds

Buyers of ETFs beware, as last Thursday's selling exposed a fundamental weakness
in the structure of the exchange traded fund. Unlike a mutual fund, which allows
the investor to buy or sell at the daily net asset value, ETFs can trade at
a premium or discount to their net asset value (NAV). At any point in time,
an investor can overpay for an asset (i.e. premium) or receive less than the
asset is worth (i.e. discount).

These premiums and discounts can be tremendous on days with big NAV changes,
as investors realized Thursday. The chart below shows the NAV trading premiums
and discounts for the MSCI Emerging Markets Index ETF (EEM) over the past year.
As you can see, the ETF often experienced significant premiums and discounts
in this time frame, however, the discount was never as severe as it was last
Thursday. As panic selling set in last week, the discount grew to be as much
as 2.56 percent. Simply stated, "at the very moment of maximum selling, the
ETF exacts the maximum trading cost from the seller (and rewards the buyer
similarly, with a discount)," says Brendan Conway from Barron's.

By clicking the link above, you will be directed to a third-party website.
U.S. Global Investors does not endorse all information supplied by this website
and is not responsible for its content.

He explained the difference in the pricing of the MSCI Emerging Markets Index
compared to the underlying ETF. Using data from Morningstar, he writes:

"iShares fund enters Friday's trading session with a closing Thursday market
price of $36.88. But the NAV is $37.85. It's about a full dollar higher.
View it in total-return percentage terms: EEM's market price was down by
16.4% as of Thursday's close.
But the NAV had only lost 13.2%. "

Conway's contrarian lesson for ETF investors: "Don't sell into a panic. ETFs
are built to penalize lemmings and reward contrarians."

When it comes to investing, I believe there is no such thing as a free lunch.
ETFs have relatively low expense ratios compared with actively managed funds
in the same sectors, but that doesn't mean that in the end an ETF costs less
to own or that an ETF generates better returns. On volatile days such as last
week on Thursday, ETFs can be expensive to trade.

Case Study on a Chemicals Company

Instead of seeking the short-term trade, we prefer to actively look for solid
companies that we believe will outperform over a longer period of time. One
such promising opportunity currently held in the All American Equity (GBTFX)
and Global Resources Funds (PSPFX) is materials company, LyondellBasell (LYB).

Lyondell is one of the world's largest plastics, chemicals and fuels companies,
pays a dividend and just announced that it intends to repurchase up to 10 percent
of its outstanding shares over a 12-month period.

A "combination of organic cash generation and financial flexibility" could
be potentially profitable for its shareholders, as over the next two years,
returning "cash to holders of more than 30 percent of Lyondell's equity market
capitalization," says Bank of America Merrill Lynch (BofA-ML).

The company is poised to benefit from a recent trend that's been developing
in the chemicals sector. In a recent report, BofA-ML reported that ethane will
likely be oversupplied for the next three years. This is causing ethane to "trade
near 'floor' prices as determined by the value of natural gas over this period." With
natural gas currently sitting below $4 per million British Thermal unit (MMBtu),
ethane will likely average less than $0.30 per gallon.

Ethane is the raw material that's used in the petrochemical industry, and
cheap ethane translates to significantly increased profit margins for U.S.
chemical companies, including LyondellBasell.

You can see in the chart below that U.S. chemical companies have much higher
profit margins compared to their global peers, with profit margins around $0.50
per pound. This compares favorably to the chemical companies in Europe and
Northeast Asia, which have current margins at $0.20 and $0.05 per pound, respectively.
These companies use what's called polyethylene naphtha, which is polyethylene
made from the raw material, naphtha. Naphtha is oil-based, and because oil
is much more expensive to natural gas, ethane is a cheaper feedstock.

This is just one example of opportunities you can find in today's market if
you keep calm and carry on.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors,
Inc., which manages a diversified family of mutual funds and hedge funds specializing
in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and
certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing
global natural resources fund in 2010. In 2009, the World Precious Minerals
Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four
years for that achievement. In addition, both funds received 2007 and 2008
Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a
leading publication for the global resources industry, and he is co-author
of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve
global conflict, and the William J. Clinton Foundation on sustainable development
in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator
on financial television. He has been profiled by Fortune, Barron's, The Financial
Times and other publications.

Please consider carefully a fund's investment objectives, risks, charges and
expenses. For this and other important information, obtain a fund prospectus
by visiting www.usfunds.com or by calling
1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed
by U.S. Global Brokerage, Inc.